A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

September 22, 2014

Ripple FX: the surging dollar
DXY Dollar Index and Bloomberg Commodity Index


Source: Bloomberg, as of 9/16/14. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The dollar has surged against major currencies since the end of June, with spot prices (as reflected in the DXY Dollar Index) up 5.3% to the highest level in over four years.
  • Meanwhile, the Bloomberg Commodities Index has dropped 9.3% over the same period—to its lowest level since mid-2009.
  • The most obvious explanation for both moves is the euro's recent slide against the dollar. Expectations for more aggressive easing by the European Central Bank (ECB) have weakened the appeal of the euro (which accounts for nearly 58% of the DXY Index) to the benefit of the dollar.
  • In general, a stronger US$ translates into weaker commodity prices—by convention, commodities are priced in US$ terms—and so the more the dollar rises, the fewer dollars are needed to buy commodities, pushing down prices.
  • Yet the ECB and the euro aren't the whole story: other factors include the potential for a Federal Reserve (Fed) rate increase next year, shifts in expected growth rates between the US and other countries, inflation expectations, geopolitical anxieties, and more.
  • Clearly, the driving forces behind currencies and commodities prices are complex. A confluence of factors, some short-term in nature and others part of larger trends, underscore the need for expertise when seeking opportunities in these markets.

The chart:

  • The chart shows the DXY Dollar Index and the Bloomberg Commodities Index over the past five years.
  • The relatively sharp increase in the DXY over the past three months is part of a longer-term trend of gradually strengthening that's been taking place since it most recent low in April 2011.
  • The notable decline in the Bloomberg Commodities Index over the past three months is part of a longer-term trend of weakening; the most recent high for the index also occurring in April 2011.

Context & Perspective:

  • The trends toward a stronger US$ and weaker commodity prices are not new. The US$ has been strengthening—albeit gradually—against major currencies for several years now and commodity prices have been declining more quickly and for longer. The DXY is up 15% from its most recent low in April 2011 and the commodities index is down 30% from its most recent high that same month—and down nearly 50% from its all-time high in June 2008.
  • The DXY Dollar Index is heavily weighted in euros, so moves in that currency alone can have a large impact on the index, but the US$ also strengthened relative to the majority of the world's currencies since the end of June—something that would not be reflected in the DXY as that index only includes the euro (57.6%), Japanese yen (13.6%), Canadian dollar (9.1%), British pound (11.9%), Swedish krona (4.2%) and Swiss franc (3.6%).
  • During the first decade of this century strong commodities demand from China and other developing nations, coupled with supply constraints to push prices sharply higher. In addition, expectations that this heightened demand would continue lifted prices even more. More recently, these expectations have been scaled back even as more supply of certain commodities has come to market, all putting downward pressure on prices.


The DXY Dollar Index measures the value of the U.S. dollar relative to the exchange rates of six major world currencies (the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc) which represent a majority of its most significant trading partners.

The Bloomberg Commodities Index, formerly known as the Dow Jones UBS Commodities Index, is calculated on an excess return basis can composed of futures contracts on 22 physical commodities.

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.

The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The opinions and views expressed herein, as well as references to individual companies or securities, are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or recommendations to buy, hold or sell, or investment advice.

Past performance is not a guarantee of future results.

All investments involve risk, including possible loss of principal.

Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Currencies and ommodities contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Unless otherwise noted the "$" (dollar sign) represents U.S. dollars.

This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland:
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

Qualified domestic institutional investors in the People's Republic of China (PRC), Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in the PRC and Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in the PRC, Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which may include Legg Mason International - Americas Offshore. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Canada:
This material is provided by Legg Mason Canada Inc. Address: 220 Bay Street, 4th Floor, Toronto, ON M5J 2W4. Legg Mason Canada Inc. is affiliated with the Legg Mason companies mentioned above through common control and ownership by Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.


Previous Editions

Click on a date to view that week's edition of charts.


Which Asian country will have the strongest growth in the coming year?


Which Asian country will have the strongest growth in the coming year?

Japan, as Shinzo Abe's policy initiatives take hold
India, as Narendra Modi's new government enacts changes
China, as Xi Jinping's reforms promote a stronger financial sector
South Korea, as President Park Geun-hye's plan to boost growth bears fruit

Previous month Poll

Go for growth: Where will a global recovery be strongest this year?

Europe, as countries emerge from bailouts
US, as consumers regain optimism
Japan, as stimulus programs begin to bear fruit
China, as reform and pro-growth policies continue